I founded the investment newsletter, Asia Confidential, in July 2012. Prior to this, I was a fund manager, stockbroking analyst and journalist in Asia for 13 years. Most recently, I spent two years as a portfolio manager for Asian equities at AMP Capital. For five years before AMP, I was a research analyst at Asian brokerage, CLSA, where I covered multiple sectors in Hong Kong, Singapore, Australia, Malaysia and Indonesia. And in a former life, I was a television and radio news journalist at the Australian Broadcasting Corporation.

Welcome To The New Cold War

Make no mistake: America and China are on a collision course and the battleground is Asia. The China-Japan dispute has little to do with a small group of islands in the South China Sea. It’s about a new world power, China, wanting to assert its authority in Asia. And it’s about the U.S being threatened by China’s increasing power and wanting to contain it. That’s what makes the current dispute so dangerous. Even if the fight dies down, the battle for dominance in Asia between the U.S. and China will continue.

For investors, the implications from this are not only the potential for increased trade disputes between the U.S and China. But also, the likelihood of rising friction between Asian countries themselves. In fact, we’re already seeing it as these countries are being forced to side with either America or China. Intra-Asian trade will be impacted too. Welcome to the new Cold War.

Asia is the new battleground

I have an abiding love for history. I put it down to a combination of great high school history teacher and a realisation that if you don’t understand history, you can’t possibly understand the present or the future. Anyhow, I got thinking about how we’ve been lucky to have lived through a remarkably peaceful period since the fall of communism in 1989.

The fall spurred much self-congratulation about how liberal democracies had won the day and communism was dead for good. Francis Fukuyama’s 1992 bestseller, The End of History, reflected this sentiment:

“What we may be witnessing is not only the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.”

The book was not only silly in theory but totally ignored the rise of communist China too.

Now some of you may say that we haven’t lived through a peaceful period since 1989 at all. Two wars in Iraq, a war in Afghanistan, a terrorist attack on the U.S., ongoing bloodshed in Palestine, to name but a few of the fights since that time.

Not to belittle these conflicts in any way, but they were relatively small fry compared to what happened prior to 1989. The latest Iraqi war and occupation is estimated to have had around 172,000 casualties. The September 11 terrorist attacks had casualties numbering 9,000 including 3,000 dead.

These were not total wars though. The number of countries involved was far greater in World Wars I and II, as well as the Cold War. The casualties also dwarfed those of recent conflicts. For instance, casualties during World War I numbered 22.5 million. It’s hard for many people to fathom these numbers and the destruction involved.

Which brings me to the present day. I can’t help but thinking that we’re entering a new period of rising tensions between countries. As well as a Cold War in Asia. The 2008 financial crisis and subsequent economic downturn, as well as rising food inflation, have led to the fall of several, once-considered impregnable governments in the Middle East. The installation of new governments in their place is proving problematic.

By contrast, increasing tensions in Asia have nothing to do with the economic downturn or food inflation. Instead, they’ve come about from the rise of China as a new world power. China is staking its claims as a world power both economically and politically, focusing particularly on its own neighbourhood, Asia. And other nations are increasingly concerned about it.

China-Japan dispute: appearances deceive

The current conflict between China and Japan is supposedly over five tiny, uninhabited islands, Senkaku or Diaoyu islands, in the South China Sea. And the abundant natural gas in the area. China has been challenging Japan’s claims over the Senkaku islands and its control of them. The situation has become increasingly tense and in late January there was almost a shoot-out. Japan claims that China beamed fire control radar at a destroyer owned by the Japanese Navy - a first step to potentially firing a missile at it.

The dangers of the conflict lay with politicians on all sides wanting to prove their military credentials by appearing tougher than the one another, with little regard for the consequences. This kind of behaviour is similar to that which almost led to catastrophic consequences during the Cuban missile crisis in 1962.

Stepping back from the minutiae of the dispute though, it’s ultimately about the changing balance of power in Asia.

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Early on you refer to the “rise of communist China,” which combined with your “Cold War” framework would lead one to see a Red aspect as part of this dreaded looming standoff. How so? The idea isn’t developed in the post. Many would see today’s party simply as a domestic tool for organization and control.

No that is a misunderstanding. The reference to communist China was purely to demonstrate that the liberal democratic utopia dreamed of by Fukuyama was just that, a dream.

The current and future stand-off has little to do with China being officially communist. As the article suggests, it’s more to do with a dominant power trying to prevent an emerging power from overtaking it.

In other words, it’s about power not ideology. Though I wouldn’t discount that ideology may become a part of the stand-off in future.

Where is the New Cold War? Since when did China want to exert its authority in Asia?

The US has been trying to contain China ever since 1949, with marines stationed in Japan and South Korea, aiming to stay as the only superpower after Soviet Union’s collapse. By your argument, it is China that provokes America’s recent naval build-up in the West Pacific, when all this while a significant naval force already anchored in the gigantic base at Guam.